In September 2013, the company brought on new executive management with a specific goal of accelerating development of the Biopump technology, with a particular emphasis on orphan diseases.

Biopump will be further validated in just-commenced Phase I/II trial in treatment of anemia via production and delivery of erythropoietin to patients with chronic kidney disease and end-stage renal disease.

Game plan includes in-house development of Biopump for orphan indications and potentially partnering for further development for an ESRD/CKD indication.

Snapshot

Medgenics, Inc. (MDGN) was founded in January 2000 in Israel, and remains a development-stage company with research focused on bringing a novel therapeutic protein platform technology to market. Research and development is done primarily from a Misgav, Israel facility, while the principal office is located in Wayne, PA.

The company is led by a highly experienced management team and board of directors. This includes chairman of the Board, Sol Barer, the founder and former chairman of Celgene. In September 2013, the company brought on new executive management with highly impressive and relevant backgrounds, including a new CEO, CFO and global head of R&D, with a specific goal of accelerating development of the Biopump technology. Michael Cola, the newly-appointed CEO, comes most recently from Shire Plc's Specialty Pharmaceuticals division ($2.5B annual sales), where he served as president and was involved in all aspects of the business. Dr. Garry Neil, head of Global R&D, brings over 30 years of clinical development experience to the company, previously head appointments as corporate vice-president of Science and Technology and group president of Pharmaceutical Research and Development at Johnson & Johnson, and he has been actively involved in over twenty worldwide drug approvals.

To-date, approximately $100M has been invested in development of the company's ex-vivo gene therapy technology called Biopump Platform Technology ("Biopump"). The technology is protected with 49 issued (and another 58 filed) patents. Biopump offers an innovative method of producing and delivering therapeutic proteins or peptides through the use of a patient's own skin. Biopump's ex-vivo gene therapy platform of continuous and autologous secretion of human proteins/peptides has significant upsides to other forms of gene therapy, these include the ability to titrate the dose to patients, the ability to excise the Biopump/treatment, and most notably, the versatility of the platform, which can secrete proteins, peptides and enzymes.

The initial targeted application, and the majority of the clinical development for the Biopump to-date, has been in the treatment of anemia (via production and delivery of erythropoietin to patients primarily with chronic kidney disease (CKD) and end-stage renal disease (ESRD). While the CKD and ESRD markets provide an important proof-of-concept for the technology and an attractive partnering opportunity, the most attractive applications and market for the Biopump potentially lie in the treatment of rare and orphan diseases. This new strategic emphasis for the company is already being implemented, as the company currently has several pre-clinical programs in rare and orphan diseases in early stages.

Biopump offers potentially significant advantages over traditional intravenous protein therapy, including reduced risk of adverse side effects, less frequent treatment burden, lower cost, more uniform delivery over time and less risk of immunogenicity. In addition, the unique characteristics of the Biopump technology lend themselves to a development program that can minimize risk of costly and time-consuming failure. This includes pre-clinical performance data (protein/peptide secretion levels, safety, efficacy on endpoints and duration of effect) which appear representative of outcomes in human studies.

The target markets of Biopump look to be extremely attractive. The worldwide orphan disease market, estimated at $50B+, looks to be particularly attractive given certain incentives that are in place that allow for shorter development and regulatory timelines, a guaranteed term of market exclusivity and financial assistance through fee waivers, tax credits and grants. These incentives, along with the attractive commercial economics (i.e. - high selling prices and small sales force) of the rare disease market afford the potential for high margins and profitability in just a single indication. MDGN, which is investigating several orphan targets (still at preliminary stages), hopes to have several shots on goal in rare diseases.

In early June, Medgenics announced the enrollment of the first patient in a Phase I/II Biopump clinical trial for patients with CKD and ESRD utilizing its 2nd-generation viral vector and implantation protocol. The goal of the study will be to replicate pre-clinical animal data, which has historically been highly predictive, that showed significantly greater protein production and longer duration of efficacy versus earlier versions of viral vector and implantation protocol. Initial results of the study could be available later this year, which should provide evidence of the platform's commercial potential and accelerate potential partnering discussions. The company will continue to develop its pre-clinical orphan disease pipeline, with data and guidance expected in the second half of 2014.

Biopump Platform Technology

Biopump is a novel alternative to the frequent protein injections required to treat certain acute and chronic diseases, such as anemia, HCV and others, including rare diseases. The technology is protected with 49 issued (and another 58 filed) patents.

Biopump works by converting a small slice of a patient's own skin (roughly the size of a toothpick) into a protein-producing "micro-organ", following excision, ex-vivo processing and re-implantation into the patient. Once re-implanted, the micro-organ has shown to effectively produce and secrete targeted proteins in clinically relevant amounts and durations of time.

Treatment via Biopump is a several-step process. The following graphic and related description of each step is taken directly from Medgenics' public filings and investor presentations:

The DermaVac harvesting device allows for efficient removal of micro-organs. To-date, MDGN has produced more than 20k Biopumps from in-vitro "tummy tuck" tissue, and in clinical trials, has demonstrated that the Biopumps produced from the MOs can safely deliver predetermined proteins over a sustained period of time. The Biopump technology under development includes refinements to the product inputs (most notably, a new viral vector to enhance efficacy duration), as well as optimizing the process that provides optimum durability of protein/peptide secretion.

Relative to the viral vector - viruses are unique in their efficiency in transporting genes into cells. Viral vectors are laboratory modified viruses which are used to deliver genetic material into the cells (a process called transduction). MDGN's first-generation viral vector was used in initial pre-clinical and early-stage clinical studies to demonstrate proof-of-concept, where it has shown excellent safety and clinically meaningful protein expression. A second-generation viral vector has demonstrated longer duration of efficacy in pre-clinical studies, which MDGN believes can be replicated in the current Phase I/II EPODURE trial.

Advantageous Alternative To Current Methods…

Biopump is a novel ex-vivo gene therapy platform allowing continuous and autologous protein and peptide production that is significantly differentiated from other protein replacement therapies. Protein replacement therapy is used to treat a number of common chronic conditions, including anemia caused by kidney disease, and rare and orphan diseases such as hemophilia and Gaucher's disease.

Biopump protein production creates an autologous protein from the patient himself, as opposed to recombinant proteins, which are produced in cell culture (human or animal). Autologous protein production enables the patient's own "fingerprint", or glycosylation, which is considered to have several potential advantages over non-autologous proteins. These advantages include extended duration, improved cell uptake and lower immunogenicity/toxicity over traditional protein replacement. By contrast, non-autologous proteins have the potential to be recognized as foreign, and thereby elicit an immune response in some individuals, which may result in lower efficacy or reactions requiring discontinuation of therapy.

Finally, Biopump protein production is continuous, which allows the potential for a patient to be treated for six months following the procedure. Continuous and autologous protein production more closely mimics the patient's physiological production of protein, versus the typical bolus injections of current protein therapies. Most recombinant protein therapy involves frequent dosing, via injection, of large amounts (bolus) of protein. A typical regimen can be 2-3 (or more, depending on the protein and condition being treated) injections per week. Frequent bolus injections are required, given the inherent short half-lives in the circulatory system and rapid clearance of recombinant proteins (examples in table).

Bolus injections, usually infusions of protein, result in relatively high initial concentrations in the blood immediately following administration. The protein level during the initial spike typically greatly exceeds that of the desired therapeutic level. Trough levels below the therapeutic range may also result. Levels outside the therapeutic range may be associated with less-effective treatment or higher risk of adverse events.

Trial Data Is Promising…

Biopump has demonstrated clinically meaningful protein production and excellent safety in early-stage clinical studies. Proof-of-concept was accomplished with EPODURE, MDGN's erythropoietin-producing Biopump, with a first-generation viral vector in patients with anemia from CKD. In early June, the company announced the enrollment of its new Phase I/II EPODURE trial in patients with CKD and ESRD, designed to test its second-generation viral vector and implantation protocol. In pre-clinical models, which have been highly predictive of clinical results, Biopumps with the second-generation viral vector showed significantly greater protein production and longer duration in comparison to the first-generation product.

Phase I/II Dose-Escalation Study

Proof-of-concept was demonstrated in the initial Phase I/II study using EPODURE for the treatment of anemia in pre-dialysis patients with chronic kidney disease (CKD). The study, which began in 2008, was conducted at two sites in Israel, Hadassah Medical Center and Tel Aviv Sourasky Medical Center. The open-label, dose escalation study contained three EPODURE dosage groups; EPO of 20, 40 and 60 IU/kg/day - these dosage were chosen to closely correspond to FDA's recommended dosing range of EPO from 50 to 150 IU/kg three times per week (~20-65 IU/kg/day). This was primarily a safety study, although key efficacy endpoints were also of interest, namely hemoglobin response to EPODURE and duration of effect.

EPO injections were discontinued at least four weeks prior to the study for any patients that had been receiving EPO injections. Ten micro-organs were harvested from abdomen tissue of each patient via DermaVac and using local anesthesia. The samples were processed over two weeks in a GMP laboratory to convert them into EPODURE Biopumps using the first-generation vector. Each Biopump was calibrated to produce the predetermined (20, 40, 60 IU/kg/day) EPO, based on the patient's weight. The determined number of Biopumps were then implanted in the patient under local anesthesia.

Summary results were presented in November 2012 at the American Society of Nephrology meeting. Safety was considered excellent, with no serious adverse events.

Serum EPO became rapidly elevated within the first day after implantation, although declined below the therapeutic level within 30 days. Despite this short durability of EPO production, many of the patients did not require the use of supplemental EPO injections in order to maintain hemoglobin (hgb) levels. Five of the seven patients in the low-dose level (20 IU/kg/day), seven of seven patients in the mid-dose level (40 IU/kg/day) and two of five patients in the high-dose level (60 IU/kg/day) did not require the use of supplemental EPO for three months or longer. In addition, three of the seven patients in the low-dose level, five of seven patients in the mid-dose level and one of five patients in the high-dose level did not require the use of supplemental EPO for six months or longer.

Fourteen of the 19 patients' hemoglobin levels were maintained above 9g/dl for at least three months, and in nine patients for at least six months without the need for supplemental EPO injections. For reference, FDA's current guidelines are for hemoglobin to be maintained at a level high enough to avoid the need for increased transfusions and below 11g/dl. Key for MDGN in terms of demonstrating safety was the ability to deliver EPO at levels in a safe range (i.e. - below 11g/dl). MDGN hopes to show maintenance of hgb in the 9g/dl-11g/dl range for more than six months in its Phase I/II ESRD study, which uses the second-generation vector.

Viral vectors for transduction used have included Helper-dependent AdenoVirus (serotype 5) (HDAD) and Adeno-associated virus (AAV LK19). Good results have been obtained with both, however the secretion profiles vary, with HDAD showing higher levels of secretion but a more pronounced reduction in transgene production over time, and AAV having a lower but flatter secretion profile. The company believes that the two vector systems are complementary, with preference to the disease target and transgene.

The company has continued to improve the platform. Recently presented data showed the "second-generation" HDAD vector system, together with modifications to culture conditions and insertion technique, resulted in a substantially higher level of production and slower "decay" curve, in-vitro and in-vivo. This new vector system expressing erythropoiten has been selected for the second clinical trial in CKD and ESRD patients.

MDGN Initiating Phase I/II Study With Next-Gen Vector

In June 2014, the company initiated a new Phase I/II study titled: Safety and Efficacy of Sustained Erythropoietin Therapy of Anemia in chronic Kidney Disease Patients and End-Stage Renal Disease Dialysis Patients Using EPODURE Biopump[1]. Preliminary data are expected later this year. Per clinicaltrials.gov, the estimated final data collection date for primary outcome measures is December 2015, and should allow for a one-year follow-up of most patients.

Aside from the use of the new-generation viral vector and new implantation techniques, the ESRD/CKD study is expected to be similar in design to that of the initial study. The primary outcome will be maintenance of hemoglobin in the range of 9g/dl-11g/dl for more than six months. Duration of EPODURE secretion will be measured by serum levels above baseline. Patients will receive their own individually-targeted dose of EPO delivered via EPODURE, which will be determined by body weight, the average EPO previously administered, and historical hgb levels.

This Phase I/II open-label study, which is being conducted in Israel, is also designed to be dose-ascending with three cohorts; lowest dose of 18-25 IU/kg/day, middle dose of 35-45 IU/kg/day and the highest of 55-65 IU/kg/day. Initial patients will receive the lowest of the three doses. Total enrollment could include as many as 18 patients across three dosage cohorts, but this will also be dependent on interim data.

STRATEGY: Validate With EPODURE, Commercialize For Orphan Diseases…

Assuming a positive result from the study and the subsequent commercial validation for the Biopump ex-vivo gene therapy platform, Medgenics will most likely look to partner the program with interested parties in the anemia space.

Concurrently, it expects to focus its internal development efforts on other applications for Biopump - namely, for orphan and rare diseases. Orphan designation by the FDA offers certain benefits (which we discuss below), including the likelihood of shorter development timelines, higher probability of regulatory approval and faster time to market, as well as potentially greater profit potential as compared to a non-orphan indication.

The company has not disclosed specific orphan diseases that it may target, although it has noted that it recently initiated pre-clinical testing of Biopump in several orphan and rare diseases, and expects to focus on indications which do not have current effective treatment or that have opportunities to substantially improve upon existing therapies. The company further noted that it will identify which specific disease and indications once it has applied for intellectual property protection or regulatory exclusivity around the respective technologies (which could potentially happen by current year-end). MDGN has already obtained orphan drug status for INFRADURE for treatment of hepatitis D, although the company will not be pursuing this.

Attractiveness of the Orphan Disease Market

The Orphan Drug Act of 1983 (ODA) was signed into law to encourage and facilitate the development of drugs that treat rare diseases. The Act defines rare diseases as those affecting less than 200k people (~1 in 1,500) in the U.S. The ODA includes several incentives to promote the development of drugs for rare diseases, something that might otherwise be an unprofitable endeavor for life sciences companies. Incentives include seven-year marketing exclusivity from the date of FDA approval (or until patent expiration, whichever is longer), tax credits equal to 50% of related development costs (with a 15-year carry-forward provision), grant funding, waiver of PDUFA (Prescription Drug User Fee Act) application fees, FDA fast-track approval and research design support.

A similar act was passed in Europe, where "rare" is defined as diseases affecting less than 300k people (1 in 2,000). Other countries also have some form of an orphan disease law, including Japan, Australia and most countries in South and Latin America.

These incentives have resulted in significant interest from drug manufacturers in developing orphan drugs. Since the law was passed, over 400 orphan drugs have been developed in the U.S. to treat over 2,700 diseases, with many of these drugs reaching blockbuster status. In fact, in 2012, approximately one-third of drug approvals in the U.S. were for orphan designations.[2] There are currently approximately 7,000 diseases categorized as rare, and this is increasing at a rate of approximately 250 per year.

Other advantages include that development can be done quicker and clinical trials accomplished with much smaller patient enrollment as compared to development of drugs targeting non-orphan diseases. Shorter development times and fast-track approval means orphan drugs may reach commercialization faster than traditional drugs. Orphan drugs also appear to have a better track record in terms of chances of approval, with one study (which included only those candidates that were eventually filed for approval) showing the success rate of orphan drugs from Phase I to approval to be approximately 22%, compared to ~11% for non-orphan candidates.[3]

Orphan drugs can also command significantly higher prices than their non-orphan counterparts as a result of the relatively tiny patient populations, high unmet need and lack of competing products (which is further facilitated by the seven-year exclusivity). The combination of quicker time to market, higher prices, rapid market penetration and typically lower commercialization and marketing costs (i.e. - smaller sales force and more direct targeting as a result of the smaller patient population) offers high revenue potential, very attractive margins and beefy return on investment with orphan drugs - this is despite the fact that these drugs target only a relatively small patient pool.

A study done by Thomson Reuters Life Sciences Professional Services and Pfizer, titled Orphan Drug Development: an economically viable strategy for biopharma R&D[4], published in the July 2012 issue of Drug Discovery Today, found that the economics and payback from development of orphan drugs is more favorable than that of non-orphan drugs. With key drivers that included the ODA incentives, shorter development timelines (~30% shorter for orphan vs. non-orphan), higher probability of regulatory approval following submittal (~93% for orphan vs. 88% for non-orphan), premium pricing and lower marketing costs, among others.

The study also found that the value of drugs which were indicated for more than one orphan disease were about four times as great as those indicated for only one orphan disease. The compilation of benefits are likely behind the significantly faster recent growth (~26% vs. 20% CAGR from 2001-2010) of the orphan drug market, as compared to their non-orphan counterparts (see chart). These are clearly also the reasons why Medgenics sees the orphan market as particularly attractive.

In terms of overall value of orphan versus non-orphan drugs, the Thomson Reuters study found that despite a much smaller patient pool, the present value of revenues of orphan drugs is similar to that of non-orphan drugs. Using a sample set of 86 orphan drugs and 291 non-orphan drugs, the study found that the average present value of orphan drugs was $12.1B versus $11.5B for non-orphan drugs, and an average per-year value of $406M for orphan and $399M for non-orphan drugs.

According to Brian Lester, senior analyst and managing director at Manning & Napier, life sciences companies with an orphan disease focus command a higher value than traditional non-orphan drug companies as a result of the competitive benefits and continued optimism for the profitability of these companies. He also notes that he expects this competitive edge over the primary care business model to be maintained in the future.

This, combined with pharmaceutical companies increasingly looking to diversify into new drug areas to increase profitability, which includes the orphan drug space, potentially puts a premium value on companies such as Medgenics in an acquisition scenario. And as drugs and technologies that can address more than one orphan indication are worth significantly more than single-indication orphan drugs, Medgenics' platform technology could eventually command substantial value.

Investment Considerations:

Near-Term Trial Data Will Steer Development Strategies

Expect flow of pre-clinical and human trial data which will provide more insight into the safety, performance and overall utility of the Biopump technology. This includes expected near-term data from ongoing pre-clinical studies in orphan indications and results from the Phase I/II ESRD study using the 2nd-gen adenoviral vectors. Interim results of this ESRD study could be available later this year, and are likely to provide substantial insight into the performance and safety of this new vector - and assuming positive on both fronts, should provide more information to firm up management's strategy towards their quest for a partner for further EPODURE development and plans for accelerating development for rare diseases.

Relative to orphan disease targets, MDGN has indicated that it has already begun pre-clinical work on the "highest potential targets". Initial work includes synthesizing the complementary DNA (CDNA) to produce the viral vectors. These will then initially be used with live "tummy tuck" human tissue to create Biopumps in in-vitro studies, which, assuming positive results, will be followed by mouse studies. Mouse models have shown to be fairly accurate predictors of what to expect in clinical trials - which provides the benefits of increasing the odds of clinical trial success, and uses capital resources most efficiently - it also means that clinical trials can potentially become "pivotal" at a relatively early stage (i.e. - in Phase I or Phase II).

The company will not reveal which particular orphan indications it is pursuing until it has applied for intellectual property and regulatory exclusivity protection around the respective technologies. We think an announcement could come by the current year-end. In fact, in a recent investor presentation, MDGN indicated that it expects to have pre-clinical proof of concept data on several orphan targets in the second half of 2014. The company has noted in recent investor presentations that its focus is on orphan indications that other parties have pursued (presumably with injectable proteins) and for which proof-of-concept had been established, but for which development was discontinued due either to an inability to produce the certain protein or due to insufficient half-lives of the protein.

We expect release of the pre-clinical data will provide more clarity in terms of next steps and timelines of mouse studies, as well as what initial orphan targets that the company may look to pursue.

Development and Commercialization Runway

While development of Biopump is de-risked to some extent, as pre-clinical work can be done relatively inexpensively (cDNA development costing only a few thousand dollars and mouse models costing only ~$100k per indication) and rapidly, and mouse models have shown to be predictive of human studies, human studies will be much more expensive and time-consuming. Current timelines include initiating proof-of-concept studies with several orphan indications in 2014, and anticipate commencing Phase I studies in 2015.

The pursuit of orphan targets has the potential to reduce the risk of clinical trials as a result of the ODA incentives, relatively fast pace (relative to non-orphan drugs) and small size (typically less than 100 patients) of clinical trials, and the inherently higher regulatory approval rate of such drugs - although this will still be a costly and likely multi-year process. Presumed higher probability of success with an orphan indication is particularly beneficial in terms of de-risking development.

As such, if one or more of MDGN's product candidates does eventually reach commercialization, it is unlikely to happen or generate any significant revenue for at least the next few years, if ever. The aforementioned Thomson Reuters study found the average time from Phase II to launch for orphan drugs is approximately 3.9 years. Another study (Kaitin and DiMasi)[5] found orphan drug trials from Phase I to NDA take approximately 5.9 years, and the approval process adds about another year (~7 yrs from Phase I to approval).

An example of the time frame for orphan indication trials is Synageva BioPharma (NASDAQ:GEVA), which is developing sebelipase alfa (SBC-102), an orphan designated compound for lysosomal acid lipase deficiency. In May 2011, Synageva presented pre-clinical mouse data on the compound, in December 2011 Phase I/II had completed enrollment, and in February 2013, its Phase III study had commenced, with data expected later this year. So over the course of approximately only four years, development progressed from pre-clinical mouse studies to (expected) announcement of Phase III data.

If MDGN can follow a similar timeline, we would expect Phase III data could be available sometime in 2018. Assuming Fast-Track Approval and Priority Review, it is conceivable MDGN could have an orphan designated Biopump on the market by late 2018 or 2019.

Competitiveness

So while no Biopump candidate is likely to launch in the near term, we think certain significant competitive advantages provide it with the potential to be successful if and when the technology does reach the commercial market. Biopump may also be more "competitive" to other products, namely injected therapies, in terms of development cost and timelines, speed to market and derivative indications.

Biopump, which essentially uses the patient's own skin as a "protein factory", does not require an expensive GMP (Good Manufacturing Practices) protein production plant like recombinant proteins do. Recombinant protein plants can cost several hundred million dollars, and take years to build. Manufacture of proteins for clinical trials can also be a time-consuming and relatively expensive process - particularly as protein manufacturing is scaled up for larger studies. As such, cost and time of development can be much less with Biopump compared to injectable proteins. Biopump may also be more easily developed for a variety of indications than recombinant proteins, given that Biopump is being developed as a platform technology and much of the indication-dependent modifications may be able to be validated in pre-clinical studies - meaning that the Biopump technology may not require significant time or investment to "retool" from indication to indication (although each indication will require separate regulatory approval).

There are several clinical benefits of Biopump versus injected proteins. The use of native tissue means there is less risk of immunogenicity or other adverse treatment-related side effects, and potential for much longer duration of therapeutic effects. In the event that treatment needs to be discontinued, Biopump can be ablated to immediately stop protein delivery - that is not possible with injected proteins. Biopump delivers protein in a fashion that much more closely resembles that of the human body, compared to recombinant proteins, which are delivered in frequent bolus injections and have peaks which massively overshoot the optimal therapeutic range, which are then followed by troughs which fall below the therapeutic range. Biopump also offers a much lower treatment burden and advantageous patient convenience, compared to protein injections which may be required several times per week for months or even years. Superior patient comfort can also result in greater compliance.

Commercialization

As an approved commercial product is still years away, MDGN has yet to outline a definitive commercialization strategy for Biopump. The current general plan includes seeking a partner to complete development of EPODURE past Phase I/II and into commercialization.

We think successful Phase I/II studies with the new viral vector could be a catalyst in generating interest in the candidate. As the EPO market is highly concentrated among only a few companies on both the drug (J&J, Amgen, Roche) and clinic side (DaVita, Fresenius), the potential list of interested partners may be short. But these also may be highly interested in EPODURE, given the huge market for EPO (~$3B U.S., ~$9B global), the aggressiveness of EPO manufacturers in defending their market share and significantly reduced sales of EPO products as a result of FDA actions, including black box warnings, as well as recent cuts by Medicare in reimbursement for drugs. As such, and assuming continued positive trial data and a feasible commercialization pathway, we think there could be real interest in EPODURE (either as partners or potentially as outright acquirers of EPODURE) from EPO manufacturers or even dialysis clinics - the latter, which are at the mercy of the EPO manufacturers in terms of having to source the product at what has historically been less-than-attractive pricing.

Timing and the strategy for commercialization for any orphan indication is also highly uncertain. However, MGDN has indicated that it may consider selling Biopump direct with its own sales force for an orphan indication. Given that rare diseases are defined as only affecting 200k or fewer Americans and orphan drugs have no competition, MDGN would conceivably only need a skeleton-crew sales force and a fairly modest marketing budget. The inherent economics of orphan designation, including high selling prices and guaranteed seven years of marketing exclusivity, also play into MDGN's favor if it chose to "go it alone" for an orphan indication.

Once the specific orphan indications that MDGN may pursue are revealed, we should have a better idea of the initial target market sizes and the company's opportunities, as well as potentially more insight into development and (perhaps) commercialization timelines.

Feasibility of Commercial Production

Until recently, all processing of harvested Biopumps was done manually by highly-trained personnel in GMP clean rooms in Israel. This "open system" is relatively costly and inefficient, and while potentially viable to support small clinical trials, it is not intended for or necessarily economically feasible for commercial-scale Biopump processing.

The company is working on a more commercially-viable system for Biopump processing. This includes development of closed chambers for Biopump processing instead of the open system, and establishment of a contract manufacturing center in California. In the closed chamber system, MO's can be harvested at one location, placed in the closed chamber and sent to the contract manufacturing center, where the MOs are processed into functioning Biopumps inside the chamber. MDGN has demonstrated that the closed chamber system can produce Biopumps that are comparable to those processed in the open, clean room system.

As the Biopump system is very different than conventional protein therapies in terms of production and distribution, the economics of Biopump may also be very different. Given the early stage, there are a plethora of unknowns related to the economics of Biopump commercialization, including the size of respective target markets, selling prices and infrastructure costs, among many others. The cost and efficiency of Biopump processing is likely to be a major determinant of the potential profitability of the technology. So while the viability of economical commercial scale production is currently unclear, the company has made significant headway in streamlining the processing function via the closed chamber processing system. Additional refinements in order further automate the system will presumably lower the cost of production and improve the chances of feasible and economical commercial production.

Experienced Management/Board

An investment in MDGN is very much an investment in the new management of the company as well, which we view as top-notch, which has significant and relevant experience in large molecule drug development and commercialization, and which has already implemented significant changes - the totality of which we think offers greater chance of ultimate success of the Biopump platform. Management has already made substantive strategic changes including de-prioritizing INFRADURE and HEMODURE in order to conserve resources, reduce risk and focus on the highest potential markets - those being orphan diseases. The new strategy also includes partnering mid-to-late stage development of EPODURE and licensing commercial rights - a decision that makes sense given the incestuous nature of the EPO industry and the vast distribution and sales infrastructure that would be required to service the relatively large ESRD/CKD market.

Confidence in leadership and strategic direction of the company is further bolstered by the resumes of the Board of Directors. This includes in Sol Barer, the founder and former chairman of Celgene.

Valuation

Given the early stage of the company and the significant unknown of what (or which) orphan indications the company expects to target, along with various uncertainties that are inherent of most development-stage companies, valuation is less than straightforward. We think the most reasonable methodologies are to use a pure-play development-stage orphan drug company as a comparable, and DCF valuation based on annual revenue of an "average" orphan drug.

Comparable Methodology ~$300M Market Value

Synageva BioPharma is developing sebelipase alfa (SBC-102), an orphan designated compound for lysosomal acid lipase deficiency. The market for SBC-102 has been estimated at approximately $600M per year. The company went public in 2011, with the stock commencing trading in July 2011. In December 2011, GEVA completed enrollment of its Phase I/II study for SBC-102 - at that time, the company had an approximate $310M market value. GEVA's current market cap is $2.6B.

We think it is reasonable to equate MDGN's current product development status with that of GEVA's when enrollment had completed for SBC-102 and when the company traded at a market value of ~$300M. While MDGN has yet to commence enrollment for an orphan designated clinical trial, we think its development status is comparable for several reasons. EPODURE had demonstrated efficacy (with no safety concerns) in Phase I/II trials, and was slated to enter Phase II studies in the U.S., until MDGN decided to amend the IND with the next-gen vectors. The current EPODURE (next-gen vector) Phase I/II trial is expected to have top line data later this year. And while MDGN has yet to announce its intended orphan targets, the Biopump platform had already received orphan designation for INFRADURE - as such, it is conceivable it could receive orphan designation for other targets.

"Average" Orphan Company Value ~$250M

We also use an "average" orphan company valuation methodology based on statistics from the study which we cited in the body of this report, done by Thomson Reuters Life Sciences Professional Services and Pfizer. According to that study, the average per-year revenue of orphan drugs is approximately $600M. We have built a DCF model that more conservatively assumes $450M of revenue is generated over the remaining patent life of one orphan designated Biopump product. Other assumptions are that this product launches in 2020 (we think a 2018 or 2019 launch is also reasonable), has 14-15 years of patent life remaining, revenue falls 50% per year each year after patent expiration and, given the high selling prices of orphan drugs, commands gross margins of 80%-85%. We estimate operating expenses at just 20% of revenue given that orphan drugs can typically be detailed with a small sales force and relatively little overall marketing support. Using a 10% discount rate values the company at approximately $1.1B. Discounting this by the ~22% probability (per Thomson study) that an orphan drug in Phase I eventually is approved values the company at approximately $250M.

Value MDGN at $275M

Average of these two methodologies puts the value of MDGN at approximately $275M. We also think that there is potential additional value from the possibility of licensing EPODURE, which is not considered in this figure. We also note that this $275M valuation only assumes eventual approval for one orphan indication. As explained in the Thomson study, the value of drugs which were indicated for more than one orphan disease were about four times as great as those indicated for only one orphan disease.

We currently value the company at $275M, or approximately $15/share. Further successful progression through the development pathway should provide for additional de-risking and potential upside to our current $15/share target price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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